The Benefits of Dynamic Pricing of Default Electricity Service Bernie Neenan UtiliPoint International Prepared for Assessing the Potential for Demand Response Programs Institute for Regulatory Policy Studies May 12, 2006

2 Source: The Benefits of Demand Response in Electricity Markets and Recommendations for Achieving Them. Feb. 2006,. USDOE < 15 min Energy efficiency Price-Based Demand Response DA-RTPRTP TOU Years System planning Months Operational planning Day-ahead Scheduling In-day Dispatch < 15 min System management action Time scale RT balanced and regulated system Induced Demand Response ICAP KWH Bidding Emer DR DLC I/C Load Integrating DR into Electricity Markets

3 Dynamic Pricing – It’s About Time 6:00 am 1:00 am 10:00 pm 12:00 pm 8:00 am 12:00 6:00 pm 2:00 pm x.x Indicates the relative price/kWh Higher price ratio 1.2 TOU 3 (6 hr) 1.75 Cover swing hours } } TOU 2S (6 hr) 2.0+ Maximize price ratio } TOU 2 (16 hr) } }

4 Dynamic Pricing – It’s About Time (2) TOU 2S (6) 2.0+ VPP (6) 1.1 to 10 Tie daily peak prices to market prices 1.0 RTP Tie all hourly prices to market prices CPP (6) 1.50 or 5.0 One peak price for normal days, and another for extreme days

5 Benefits of Dynamic Pricing Participant Savings  Savings to customers that take default service consist of two components: Avoid paying the hedged service risk premium Savings from demand response behaviors Savings from shifting away from high prices Consumer surplus from expanded load at low prices Benefits to all Electricity Consumers  L ower LMPS reduce bilateral market prices: Lower competitive prices Lower default service prices

6 Benefits of Dynamic Pricing (2) Peak Load Reduction – Two Measures  Maximum single hour of demand response (MW) on annual basis  Average level of demand response (MW) coincident with June, July, August and September monthly zonal maximum demands Market Performance benefits  Resource Savings - Improvement in the efficient allocation of societal resources

7 Benefits of Dynamic Pricing (3) Other Benefits  Improved reliability  Market power mitigation  Reduced emissions  More choices  Portfolio risk reduction  Vertical market development (enabling technologies) These are hard to quantify, redundant or both

8 Benefits of Dynamic Pricing of Default Service in New England Service Benefits of alternative default service pricing Targeted to New England customers over 500 kW Customers distinguished by:  Business activity  Load size and profile  Price response (from NGrid Study) Scenarios characterize market supply as:  Status Quo (2004-5)  High (more high prices more often)  Extreme (even more higher prices more frequent)

9 Alternative Designs Evaluated VPP (6) 1.1 to RTP CPP (6) 1.50 or 5.0 TOU 2 (16 hr) TOU 3 (6 hr) 1.75 Current Default Block & Swing Dynamic Default Service Alternatives

10 Block and Swing Block and Swing Design Nominate kW (peak and off- peak) to fixed price block (TOP) Variance settled at the corresponding RTP swing price 1.0 RTP 1.2 TOU Block Load Pricing + Swing Load Pricing

11 PRICE FX SS and DD Simulations PRICE FX SS and DD Simulations LMPs (DA & RT) by Day Type, Price Scenario Price Elasticities by Business Class Customer Profiles and SICs LSE Energy Market Savings LSE Energy Market Savings LSE Hedge Savings LSE Hedge Savings Net Social Welfare Improvement Net Social Welfare Improvement Participant Bill Savings Participant Bill Savings Status Quo Yr Extreme Yr High Yr 5 -Yr. Benefit Outlook Market Outlook Price FX Model Rates

12 Maximum Non-Coincident Peak Load Reduction – New England ~ 600 MW

13 Average Coincident Monthly Peak Load Reduction – New England ~ 200 MW Coincidence of High Prices and High Load

14 Benefits – Five Year Outlook – New England (33% of customers over 500 kW price responsive)

15 Some Observations Autonomous price response is the desired end result  Don’t expect bloom naturally  Flat default service engenders price inelasticity  Dynamic default service fosters the development of price response Load bidding as a resource is poor second best solution Because reliability is a social good, ISO ICAP, emergency and ancillary service programs

16 Summary I welcome your comments and criticisms: